tv The David Rubenstein Show Peer to Peer Conversations Bloomberg November 3, 2018 2:30am-3:00am EDT
>> the bloomberg commodity index, oil traded below the 200 day moving average. maritime winners and losers. why medium range takers will see -- tankers will see a windfall with imo 2020. commodities in the crosshairs. in colorado, the midterm elections are a turning point for the way some companies do business. ♪ i'm alix steel. welcome to bloomberg commodity's edge. 30 minutes focus on the companies, physical assets, and
the hottest commodities with the smartest voices in the business. first we kick it off with spot on. it is our take on the top story. our spotlight today is on earnings from big oil. two surprise m&a deals. i am going to kick it off with the m&a deals. chesapeake buying wildhorse this week and in canada by newfield. >> the market wants boredom, they don't want surprises and excitement. over the past 10 years, it has been an exciting time for u.s. oil production. it has just hit a new high. investors want to see evidence of that paying off. they want dividends. if you announce a big deal, you are reviving memories of the old playbook. expand, expand, expand and the
profits will come sometime down the road. alix: neither were in the permian, i thought that was interesting. >> most of the deal so far this year have been in the permian basin. prices are skyhigh, so people are looking elsewhere. the oil there continues to trade at a steep discount to wti oil. people are looking at the eagleford, which trades at a nice premium. it is linked to bread pricing. the valuations are a lot lower for companies who want to add inventory so they can better add to their cash flow and balance their balance sheet. alix: no doubt this the beginning. is it mid-caps, large guys? we are we going to see the most activity? >> i don't think the large-cap names will add inventory. they have a clear message from equity investors. we are not going to compensate you for adding inventory beyond 10 years, we basically want you
to compensate us for owning your stock in the form of a dividend or buyback. i think the deals that will come into play between now and the end of the year will be in the $1 billion to $5 billion range. alix: i found it interesting that usually investors have a little bit of sway in the last year. that did not work for this deal. >> not for this deal. we have seen evidence of it in other companies. results from conoco phillips, the poster child for this. we are still seeing these deals happen. it is the dna of this industry to want to expand. if you look at the deals that have been announced, the valuations are pretty low. i don't think anyone can say they have overpaid. i think the problem is, people are saying, did you actually need to do this deal? they already had free cash flow coming through.
people are saying why do this. alix: let's go to concho. they kind of did it right. they are going to go the dividend route. other companies are still blowing past some of their budget. the estimation is they will increase it and do more than we have seen. what do you think? >> investors want to see profits rather than growth at all costs. you will notice the ones that are are being rewarded for it. a great example is conoco and et reported results on the same day. conoco stuck with their message. the cutie completely reset -- eqt reset things. their stock has slumped in a sense. alix: you have u.s. productions surpassing russia short-term.
can that continue? if investors continue to put pressure on companies to not spend as much on and do more dividend buybacks? >> the interesting thing is we thought that companies would see their production figures hampered by what is going on in the permian. the fact is they have not. the oil services companies, they are the ones that have been hampered because companies are deferring completions of the wells. eventually that oil will come to market. to your point about whether the production can continue, the efficiencies are still there. alix: fair enough. well, some of the big oil ceo's are still very positive. i spoke to the bp ceo. here is what he had to say. >> things look well. we have had a strong quarter that is built off the back of the six previous quarters in terms of the plan we laid out. $70 is a pretty good price right now in terms of the next six months.
alix: $70, sustainable tomorrow? >> i think so. the markets are caught up in the new rent in terms of investment visa. you have interest rates going up in the u.s. you also have the ongoing acceleration of the trade war and that threatens to derail demand. we know with commodities, the best cure for low prices is low prices. i think prices will continue to be volatile, mirroring the broader markets, but $65 to $75 is a range even though temporarily we can move outside of that. >> i think the $70 price is what they are using to justify the all caps deal for the php assets. any oil exec at this time must be wary about oil prices being higher. investors are not buying it. alix: fair point.
great to see you both. coming up, it is not just candidates on the ballots next week. we will also have major commodity initiatives from colorado to arizona to nevada. we will dig into the big money behind the key votes. take a look at this chart, a mining company. the first annual rise since 2013. this is "bloomberg commodities edge." ♪ alix: i'm alix steel.
the u.s. the big news, oil sanctions will hit on sunday. india and south korea have agreed with the u.s. on a waiver outline from iran. these are the top buyers from iranian crude, china and india front and center. how much will they have to reduce imports before they get that waiver? it was 20% under president obama. some say it could be as high as 50%. and what will happen to china? and, it is a big pain for soybean farmers. china imported the lowest for september of soybeans since 2016. 8 million tons. soybean imports from the u.s. fell 80% to 132,000 metric tons. brazil was the one that fulfilled most of china's needs. i want to dig deeper into brazil's presidential election.
>> [speaking foreign-language] our governor will break the paradigm. we will simplify things and allow people and entrepreneurs to have more freedom to build the future. we will unite brazil. alix: joining me is bloomberg economist for brazil. what does the election mean for the short-term and medium-term? >> short-term, it means currency tends to be stronger than before, because there is this expectation that firms will be approved. in the long-term, we expect currency to go back to the long-term average, after 60, something like that. alix: into the election, some of the soft commodities moved as the real actually strengthened, and they moved higher because of the real is stronger, farmers do not want to export, they will hold onto it until prices go higher. what does that wind up meeting going forward in terms of the
commodity world, in terms of the investment business world? >> for commodities, it tends to be bullish. for businesses in brazil, we expect some deregulation going on. this probably will increase the growth in brazil, but we have to remember there are some obstacles in the middle of the way, reforms that need to be approved. alix: adriana topeka, thank you very much. let's get into the ring. colorado voters are about to step into a fight between big oil and environmentalists. on tuesday, the state must decide on proposition 112, which would require oil wells to be away from certain places like homes. what are the chances this goes through? >> it looks too close to call. the polls have shown that it
will pass in some cases, in some cases it won't. the industry is spending a lot of money to make sure it does not. certainly too close to call. alix: the companies have put so much money into fighting for this. anadarko has a big stake here, $30 million spent trying to defeat prop 112. what is at stake? who is going to be the worst off? >> it is still too early to say. the regulatory environment is not quite fully formed. there is a lot of opposition to 112 not just from the companies, but politically as well. time will tell, to a degree. but pass or fail, 112 will provide a degree of impetus for more stringent policy in this arena. alix: how much state land will
be off-limits? >> it will vary by county. if you look at one county where 90% of the state's oil comes from and about 40% of the national gas comes from, the estimate from the state regulator is that it can be up to 80% of the surface area becoming unavailable to new activity. >> how long can this fight last? even if he goes through on tuesday, are there going to the lawsuits? >> i think there is definitely more to come. the big thing will be what legislatures decide to do. they will have the option to repeal this if it does go through and if they think it should be changed. the regulatory agency will also develop new standards most likely. alix: thanks so much. james blatchford of bloomberg intelligence. now, our note of the week.
iran's response to the reimposition of sanctions will be a critical factor in oil trajectory over the coming months. as regional dynamics have shifted, so has our view. rather than provocative responses, we think the international attention focused on saudi arabia amid the khashoggi crisis, iran will wait and see can approach. this is "bloomberg commodities edge." ♪ alix: it is time for the b-net
brief. for the midterms, it marks a billionaire fight in nevada. warren buffett versus sheldon adelson over customers having the right to choose their own power provider. joining is colleen regan. what is this fight between adelson and often about -- buffett about? colleen: what is on the ballot next tuesday is a question to deregulate the market and allow consumers to choose their own electricity providers. the energy currently has a
monopoly on electricity sales in nevada. we have seen a lot of industrial facilities looking to leave their territory to get lower rates and, in some cases, renewable energy. they have paid exit fees for that, but they want the right to choose without paying that fee. alix: what would happen to nevada energy if approved? colleen: that is a great question. we don't know yet. they have said they will sell all of their power plants and reassign the long-term contracts they have for a number of renewable energy projects.
what's also interesting about what they might do, and they really got renewable energy proponents in a bind here, they have signed 1000 megawatts worth of contracts for new solar and storage to come online from 2021 to 2022. they said if they lose this vote, they will not proceed with five out of six of those contracts. so those will not get built. instead they will only proceed with run -- with one project, about 300 megawatts of solar. there are renewable energy advocates who wanted this ballot question to win, and now they are thinking, we don't want that because it will slow down the rollout of renewable energy in nevada. alix: those are staggering statistics. you can see here what winds up happening if it fails or does not. what is the net of this? if it goes through, is it black and white, or are we going to go to the courts? it probably will not end with just the vote in colorado. what is the likelihood it will do that here? colleen: there will definitely be litigation if this goes forward. the question doesn't fully deregulate nevada's market by itself. it calls on the legislature to put out a bill which will deregulate the nevada market by july 2023. there is a lot that is going to
be decided as -- in the legislature and the courts. alix: thank you. now let's turn to commodity in chief, where we focus on one executive. today it is anthony gurnee from ardmore shipping. first, a closer look at the issues facing the company. the global tanker market is big. it's big moment hits january 1, 2020, with a new rule that forces the market to use low sulfur fuel. you can either buy it, which will be more expensive, or install scrubbers to clean up the high sulfur fuel, also expensive. big shippers say this could add $2 billion to its annual fuel bill. one part of the market that likes it, medium-range tankers. their size ranges from 25,000 to 55,000 ton deadweight. think of them as the taxicab of the world, shuttling projects for all the major players. they carry crude products, that low sulfur fuel everyone will want.
while the rest of the tanker market france, ardmore hopes the market in 2020 will change its fortune. alix: i recently caught up with the ceo, and he explained to me why this means more business and profit. >> we are very lucky because we are one of the segments that will benefit the most from the changeover from the demand side. new fuels are going to be moved on our type of ship. others are considering installing scrubbers, but that is on bigger ships. alix: will you use high sulfur or low sulfur fuel? anthony: we will do the switchover. initially we will burn gas, oil, or diesel.
then as the new fuel becomes available, we will switch over to that. typically that is a variable cost. it is typically passed on to the consumer anyway. in our business, we have fairly wild swings in the price of the fuel we burn. alix: even though you can pass your cost along, there is just not enough low sulfur fuel? where does it leave you? anthony: there will be an absolute surplus of high sulfur fuel. there should be enough low sulfur fuel available. we expect that oil companies will develop new types of very low sulfur fuel oil that will move away from using gas oil. we think there is enough fuel in the world to run the ships. the question is how it gets to the new points of consumption. alix: the workarounds i have heard have to do with the actual shipping him alike, you will literally go slower, burn less, and -- the actual shipping, like, you will literally go
slower and burn less. what do you see? anthony: we expect that to the extent sectors that are not benefiting from the switchover from the demand increase standpoint, that are just looking at an increase cost, and are therefore probably dealing with a challenging operating environment, they will slow down. that is the most effective way to reduce consumption on board ships. alix: you will have to pay more, but you will have to work harder because there will be more shipments, so more demand. anthony: that is right. we expect demand for our type of ship will increase by 10%, which is a significant number. alix: what does that mean in terms of your fleet? anthony: the balance of supply and demand in our business is fine, so a 10% swing in demand is very significant. that makes a difference between low rates and high rates. alix: where do you see day rates going?
anthony: research analysts are suggesting we could go back to a scenario in the mid to thousands when our business got up to -- in the mid-2000's when our business got up to 30,000 a day. currently we are earning 10,000 to 12,000 per day, so that is a significant increase. alix: the question that comes up in this market is how long the spike may last. how long do you think? anthony: a good point to make is this is not a simple flip of a switch. this is a roughly two-year transition period that will start in roughly 2019. it will involve redirecting crude flows as well as low sulfur blending stocks for the new fuels being developed, as well as moving to gas oil on a temporary basis as a substitute or high sulfur. we think it will be very disruptive, and it could last up to two years. alix: that was anthony gurnee, ceo of ardmore shipping.
their stock is down over 15% so far this year. here is what is on my radar. sunday, iranian oil sanctions will hit. look for any waiver conversations over the weekend. monday i will be interviewing the halliburton ceo. we will delve into the earnings and they are outlook for north american shale producers -- and their outlook for shale producers. also on monday, you get occidental petroleum earnings coming out after the bell. lots of questions about what will be in shareholder returns, as well as what their drilling efficiency will be. that does it for "bloomberg commodities edge." make sure to join us every thursday. ♪